Tuesday, March 7, 2017

7 March 2017: Financing Micro and Small firms during the Great Recession

Abstract:
I examine the role of bank lending frictions and the housing-collateral lending channel for small business credit in the US during the Great Recession. I use a new dataset from a leading online accounting software with millions of financial transactions, links to banks, and owner and firm addresses for small businesses. Using the failure of banks and movements in house prices in the business owners home ZIP code during this period as shocks to credit supply, I find that bank failures are associated with declines in credit for small firms (small businesses with 10 to 250 employees) but not micro firms (those with 2 to 10 employees). In contrast, movements in house prices at the owners location are positively associated with credit for micro firms but not small firms. The results suggest differences within small businesses in the channels used to overcome asymmetric information. Micro firms may depend more on personal housing collateral and small firms on lending relationships, consistent with the associated costs to lenders.